While the name Ponzi continues to ring in our ears, as Madoff sits in his penthouse prison pondering his future, his former investors ponder theirs as well. For many, the future may involve a gig as greeter at Walmart, as unpleasant as that may be. But for others, the future may mean coming face to face with the ugly claw of justice. The Department of Justice, that is.
In a legal action known as “clawback,” the special trustee handling the bankruptcy of Madoff’s firm has the power to try to recover the illusory profits reported and in some cases paid out to investors.
Officials will be seeking to recover false profits from those who received them over the years, attorney David Sheehan, who is assisting trustee Irving Picard, told scores of Madoff investors who met with him Friday in Manhattan.
While some reinvested their gains back into Madoff’s scheme, others took their profits and put them to good use. Now, they are told that these weren’t profits, as they understood them to be and dutifully reported to the delightful IRS, but “illusory profits” subject to recovery by the Irving Picard, the court appointed trustee charged with marshaling and recovering the assets for the benefit of the victims. Victims, suddenly, has a very different meaning.
This will most assuredly wreak havoc in the lives of those Madoff investors who cashed the checks sent out and used the money for other purposes. These are individuals who relied upon the representations of great returns by Madoff, just like the people who reinvested and now find themselves eating spam. The only difference is that they didn’t continue to play the game. Does this create a second class of investor, somehow more culpable than the ones who continued to seek the high returns Madoff offered? What did they do wrong by cashing the check instead of reinvesting?
The difference, from the government perspective, is that they didn’t lose as much as those investors who chose not to take their profits and run because they took profits out and hence received more than the mere paper benefit that others thought they received. But that does little to shift the moral burden from one investor to another. They are all in the same boat as far as any theoretical moral culpability for putting their money in to receive the promised high returns. That they made different choices on the way out, to cash out rather than reinvest, is hardly a distinguishing factor that justifies ruining the lives of the people who made the better choice. Actually, the less greedy choice, having decided to enjoy the high return without gambling for more.
Bear in mind, as I speak of moral culpability, that while the Madoff investers were promised, and enjoyed to some extent, high returns, this carefully crafted scheme promised returns that were very good but not so ridiculously good as to be incredible. Many, and I mean many, extraordinarily savvy investors bought into the Madoff scheme. The returns were indeed possible, if Madoff was as good as everybody believed him to be. It’s not as if these investors “knew or should have known” that they were part of a Ponzi scheme. They believed that they were being very responsible investors, and doing a very fine job of it.
This is a capitalist country, and people are allowed to seek and obtain good returns on their hard-earned money. It’s not a crime to reasonably expect, and ultimately receive, a good return on an investment. It’s not a crime to take your profits and go home. Yet those who did may soon find the government’s claw deeply embedded in their backs. As sorry as this may be for the investors who lost everything, their damage should not be vindicated on the backs of those other investors who salvaged something from their participation by reasonably relying on the validity of the profits received.
There are many victims of the Madoff morass, but the ones who took some gains out should not be singled out to suffer the government’s clawback. There is no reason that they should be victimized a second time; once by Madoff and again by the government. They’ve done nothing wrong, and they should not be made the scapegoats of this mess.
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Follow the money. You know how people are about money. And there is a legal obligation, to the creditors.
The trustee is an attorney who represents the interests of the creditors and is paid from the bankruptcy estate. His fee is a percentage of the value of any assets recovered from the debtor or “insiders” or both that are paid into the estate and distributed to creditors. He has the incentive to invoke the clawback, and to defend its legality in any “turnover” motions and hearings, to represent his clients. And to make a living! The more investors the trustee finds who walked away with their gains, and the more money he recovers from them to pay over to creditors, the more the trustee earns. The harder and smarter he works, the more he makes.
An attorney appointed by the Court to assist the trustee is also paid from estate assets, generally on an hourly basis at the Court’s discretion.
Scott, your argument appeals to me at the gut level—the feds sure do some funny thinking about money—and I want to believe it, but…
Suppose Scott owns a classic sports car. One day, Bernie the burglar steals it from him. Bernie also buys a car of the same model and year from a junk yard and transfers all the numbers from the scrap car to Scott’s car. Claiming that he’s refurbished the junk car, Bernie sells Scott’s car to Joel at a price that would be terrific for Scott’s fully-original classic car but is merely reasonable for a refurbished car. Joel files the purchase, gets a title, and registers the car successfully.
Joel enjoys his nice car for several years until one of Bernie’s disgruntled henchmen tells the police what happened. Since Scott never sold the car, it still belongs to him. Despite the fact that Joel couldn’t have known it was stolen, and depite the fact that the state approved the title and registration, Joel is still going to have to give it back.
Why should it be different for money? If the money Madoff paid his investors was stolen by fraud, why shouldn’t it be returned, as much as possible, to it’s rightful owner? How do you draw the line? Or am I missing the point?
What’s interesting about your example is that you come out on the wrong legal end. Joel is a bona fide purchaser for value and gets to keep the car. If he didn’t, no one could ever safely buy anything without knowing every second of its provenance, lest one misstep along the way make all subsequent buyers/investers subject to getting screwed.
So I’m completely and clearly wrong? Crap. I hate it when that happens.
I was under the impression that since title did not transfer with possession, it remained with Scott, so he gets the car back. Now that I think about it, I have no idea where I got that idea…usually a sign that the source wasn’t reliable.
Uhm…nevermind.
Well, if an unworthy such as myself may attempt one more comment… If a distinct item like a car doesn’t have to be given back by an innocent buyer, then there’s even less argument for giving back a fungible thing like money.